Futures contracts can be used by
hedgers and by those who speculate.
Producers or buyers of a commodity of an underlying asset are able to
hedge or lock in a price at which the underlying asset can be bought or sold.

Retail traders and portfolio managers
can position themselves to potential profit by the price movement of the
underlying asset.

Futures contracts are available for a
variety of different assets. These
include stock exchange indexes, currencies and commodities.

Futures contracts which are bought and sold over exchanges
are standardized.

A futures contract is a derivative. A
derivative “derives” its value from the movement in price of another
instrument. A derivative bases its value on the changes in the price of the
instrument that it is based upon. As an example, the value of a derivative can
be linked to an instrument such as gold. Gold futures are based upon the price
of the underlying commodity gold.

“A futures contract is a legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. Futures contracts are standardized to facilitate trading on a futures exchange and, depending on the underlying asset being traded, detail the quality and quantity of the commodity.” Source: Investopedia.com. Investopedia Definition of Futures

Standardized contracts have specifications such as:

the unit of measurement,

the type of settlement which can be physical or
cash,

the currency unit the contract for which it is
denominated,

the currency of the contract for which it is
quoted,

and the quality or grade of the particular
instrument (for instance the grade of oil or fuel).

Futures contacts can either be cash
settled, or may call for the physical delivery of the underlying. A retail
trader is probably not interested in delivering or receiving the physical asset
of the underlying. The retail trader is
usually more interested in securing a profit from the movement in the price of
the underlying commodity.

Some brokerages will automatically
close a futures contract before it expires.
This prevents taking physical delivery of the commodity. If you are
going to use futures contracts, please check with your brokerage to see if they
implement this practice which can protect you.

Some cash settled contracts at the CME Group are found here: CME Cash Settled Contracts. It is important for you to know whether the futures contract is settled in cash or the physical. As stated before, if you as an investor allow a futures contract to expire, you could be looking for a place to store the physical of the commodity which the contract represents.

A stock has the potential to hold its
value indefinitely. As long as the price of the stock does not go to zero,
stock will have some value. A futures contract is finite; it will expire
according to its pre-determined time. After expiration, a futures contract will
no longer retain any value.

Hedgers can use futures contracts as a method
to manage their business

At one time, futures were used primarily to
give farmers a hedge against fluctuations in the price of the product they
produced. A futures contract could give them the ability to remove some of the
price risk, due to the potential fluctuations in the value of their product.

To illustrate, let's say we have a
farmer who is a producer of corn. We also have a manufacturer who would like to
use corn to manufacture canned corn.

If you are a farmer/producer, you most
probably are worried about one thing – a drop in the value of your commodity,
which in this case is corn.

When the farmer is planting his crop,
he is concerned about the price he will get for his corn when the corn ripens
at a future date. The farmer wants to get the best price possible, so he can
create profit for his business. He runs the risk of the price of corn dropping
between the time he plants the corn and when it is harvested then brought to
market.

The farmer and the manufacturer are able to use futures to protect
themselves …

The farmer and the manufacturer enter
an agreement. The agreement is in the form of a futures contract. The farmer
wants to get 4 cents per bushel for his corn, three months in the future when
his crop will be harvested, which will allow him to make a profit. The farmer
agrees to sell his corn to the manufacturer of canned corn for 4 cents per
bushel. The manufacturer has determined buying corn today at 4 cents per
bushel, which will be available three months in the future, will net a profit
for his company.

If the price of the corn rises to 5
cents per bushel in three months, the farmer in a sense will lose 1 cent per
bushel. The farmer agreed to sell the corn for 4 cents per bushel at a specific
date. The manufacturer will be happy
because he is getting the corn for a 1 cent per bushel discount.

The manufacturer had a greater
benefit, but both parties should be happy because they should make a profit
according to their projected cost analysis. In a sense, both parties have won.

The futures contract reduced the risk
of the farmer/producer and the manufacturer because they will be able to close
the contract at the end of the three month period, at the price of 4 cents per
bushel.

Leverage and Futures

It is important to understand that trading futures is not for
everyone. Because futures are used for
speculation as well as a portfolio hedge for investors, they can carry the
potential for large losses.

Leverage allows a trader to enter a position in futures that is
worth much more than the up-front margin requirement.

Leverage is represented as a ratio. For example, let's say that the leverage on a
particular futures position is 20:1.
This means that if you have $5,000 in your trading account, you could
enter a futures position that is worth 20 times that amount, or $100,000.

Leverage makes it possible to trade larger positions. It may
appear tempting for some newer traders.
It's important to remember that leverage magnifies BOTH profits and
losses.

If you plan to trade futures, be sure to have a complete
understanding of how your broker handles the margin and leverage requirements.

Wrapping up futures contracts…

A speculator/investor can use futures
contracts to create potential profits. Speculators/investors can place educated
bets on the price of the futures contract going up or down. Most futures
contracts are exited before expiration. For instance, a buyer of a futures
contract can sell the contract before expiration so he is no longer in the
position.

Futures contracts span a wide array of different assets. For example, there is corn, wheat, coffee,
oil, gas, gold, silver, bonds, and stocks.

Hedgers can use futures to protect
themselves from future fluctuations in the price of a underlying asset. They do this by locking a specific price at a
specific time. A hedger in the futures market can have a plan to buy or sell a
commodity such as corn. The hedger will
then buy or sell a futures contract to secure and lock in a particular
price. The price at which the hedger
buys the futures contract locks in that price which protects the hedger from
rising or falling prices.

It is important to determine how much money you have to
invest. Some futures contracts require
more capital than others.

If you need to monitor your futures contract often it’s important to trade a futures contract which corresponds with the times you are available. Futures for the most part have certain times of the day when there is more activity. If you are trading a contract which is more active when you are available, it can be to your advantage. Usually there are better fills and more liquidity when there is more volume.

If you need to hedge against the volatility in the market, futures
could offer protection.

There are many strategies used by experienced traders who trade futures both for hedging and speculation. Aeromir is a great place to learn.

Dr. Daniel Lyons is a long-time friend and the creator of ExperCharts software, which I'll be using to generate signals for the ExperSignal trade alert service.

Daniel has PhDs in Cosmology and Applied Mathematics. His hand print algorithms he created many years ago have been applied to the financial markets. Daniel trades the FOREX market using 10-minute bars. He is giving me a longer time frame version that is more suitable for options trading.

Daniel limits the degrees of freedom to maintain reliability and consistency over time. ExperCharts has over 350,000 lines of C++ code already.

As you can see from the charts above, the software is very unique. The Neural Candles remove noise, which makes trend detection simple.

There are hundreds of millions of calculations every second that Daniel distills into charts, indicators and his engines. The result is a simplified view of the market in question with sophisticated tools to aid in determining if the market is turning or not.

The Trade Alert Service

Like many new things, unforeseen delays have pushed the launch of ExperSignal back. Daniel keeps getting closer to sending a fully debugged version to me so I can start the ExperSignal trade alert service.

THIS HAS NEVER BEEN TRADED BEFORE. HYPOTHETICAL PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

The initial testing I did was VERY encouraging.

With a four-month backtest using a simple futures-only trading strategy, the test generated over $11,000 of profit using about $12,000 of margin. The biggest drawdown was -$750 with one of the two losing trades.

Daniel is including a spreadsheet with the price data and indicator values over time so I can refine what trading strategies to offer in the trade alert service.

I anticipate have several flavors of trades available:

Futures-only

Shorter-term options strategies

Longer-term options strategies

I don't have a launch date yet, as I'm waiting for Daniel to finalize the current version. It is getting much closer each day.

NOTE: After this version is sent to me, Daniel and I are going to discuss adding ES futures to ExperCharts. The software can handle it but Daniel doesn't have data for it as he only trades FOREX. The intention is definitely to add ES to ExperCharts so I can do futures and futures options strategies on ES, which has much more liquidity than the FOREX currency futures and futures options.

Night Owl is a futures day trading system that trades Crude Oil futures (CL) and Euro futures (6E). It is has roughly a 78% win rate and generates a return of approximately 5% to 6% per month. Night Owl is flat by the market close every day so there is no over night risk.

Mark has been trading professionally for over 20-years. The seeds of the Night Owl began when his mentor, a floor trader at the CME, told Mark that many floor traders use the square of nine to find significant price levels in any market.

This started Mark on a journey to master the square of nine concept. He added other techniques and rules to development his trading style that became Night Owl.